Opinion Of Eminent Legal Luminaries On Controversial Issues

Whether TDS Is Applicable On Bill Discounting Charges?

QUERY: Mr. Champaklal seeks further advice from you on behalf of his clients.

(a) One of Mr. Champaklal’s clients is a financier and he has asked him whether section 194A would apply to Bill Discounting Charges paid by him to another financier. Mr. Champaklal seeks your advise in the matter

(b) The same financier client of Mr. Champaklal also wants to know whether the difference between price and face value of Commercial Paper is to be treated as interest or as discount. Mr. Champaklal seeks your advice in this matter also.

(c) Taking a cue from an exporter whose writ petition (in respect of 80HHC matter) had been handled by him. Mr. Champaklal has started the practice of levying interest in his Memo of Fees itself in respect of some of his regular clients who are regularly irregular in payment of his fees. His clients have enquired as to whether they would be liable to deduct tax at source u/s. 194A in respect of the interest charged by him.

ANSWER: CBDT Cir.No. 65{F. No. 275/79/TTJ] dt. 2/9/71.

“Where the supplier of goods makes over the usance bill/hundi to his bank which discounts the same and credits the net amount to the supplier’s A/c. straightway without waiting for realization of the bill on due date, the property in the usance bill/hundi passes on the bank and the eventual collection on due date is a receipt by the bank on its own behalf and not on behalf of the supplier. For such cases of immediate discounting the net payment made by the bank to the supplier is in the nature of a price paid for the bill. Such payment cannot technically be held as including interest and therefore no tax need be deducted at source from such payments by the bank.

– Where there is no immediate discounting and the bank merely acting as an agent receives on the expiry of the period the payment for the bill from the buyer on behalf of the supplier and credits it to him accordingly, the bank receives interest on behalf of the supplier and buyer will have to deduct tax from interest”.

– In ITO vs. Kanha Vanaspati Ltd. 13 SOT 285 (Del.)] held that:

“Where discounting charges were paid by the assessee in respect of an obligation incurred in relation to money borrowed through bills, these charges were rightly treated as interest u/s. 2(28A) and the same were subject to TDS u/s. 194A”.

– In Kanha Vanaspati Ltd. vs. ACIT [17 SOT 160 (Del.)]

“Where assessee had borrowed money from financiers for making payment to its suppliers and had paid ‘financial charges’ to financiers and debited same under head “Discounting charges, said discounting charges were in nature of interest & hence liable to TDS u/s. 194A”.

– Hence liable to the TDS.

CBDT Cir. No. 647 dt. 22/03/93

“The difference between the issue price and face value of the commercial papers and the certificates of deposits is to be treated as “discount allowed” and not as “interest paid”. Hence the provisions of TDS are not applicable.

– Depends upon status of client.

– Individuals/HUFs having tax audit in previous accounting year as well as firms and companies are require to deduct.


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